Banks protest gov't measures on DLF fiasco

The government is seeking to ban banks from selling high-risk products to consumers. / Yonhap

By Kim Bo-eun

Banks are protesting the government's latest move to ban them from selling high-risk products in a move to better protect financial customers. For them, the measure will lead to a further fall in profitability amid already tough circumstances due to low interest rates.

The Financial Services Commission said Thursday it will ban banks from selling private equity funds and index funds in which the possibility of losing the principal is higher than 20 percent.

The measure comes after investors in a financial derivative option tied to yields of German treasury bonds saw nearly 100 percent of their investments wiped out in September. These options are regarded as a type of derivative linked fund (DLF).

The products the government is seeking to regulate had a value of 74.4 trillion won as of the end of July. Banks are set to lose several tens of trillions of won in profit such options have generated.

This comes at a time banks are seeking ways to produce non-interest income due to the low rates.

"Basically, the government is telling banks to only accept deposits and give out loans," a bank official said.

An official of a think tank said "Banks have the largest number of branches, and therefore are the most accessible for financial customers seeking to make investments. Rather than limiting banks from selling high-risk products, it would be better to better warn investors of the associated risks."

Two banks sold the DLF options that caused the major losses, but all banks will be subject to the regulation.

Aside from banning the sales of PEFs at banks, the FSC is also seeking to raise the minimum amount of money required for individuals' investments in hedge funds to 300 million won from 100 million won

Another bank official said “The government's measures are tougher than we expected they would be. Raiising the amount to 300 million won means that those that have invested with a lesser amount will disappear.”

This could lead to a shrinking PEF market.

The tightening of regulations comes after they were eased in 2015, to enable growth of the market.

Allowing banks to sell PEFs was one such measure, to enlarge the pool of investors.

Yet the government is now seeking to ban banks from selling high-risk products, after inspections into the “DLF fiasco” found that about half of the investors that signed up for the options at banks were senior citizens with limited understanding of investment products.